Before the financial crisis, the attitude at investment banks was ‘go big, or go home’. Today, these same institutions are locking the doors, barring the gates, cutting headcount and jettisoning business lines. According to analysts at Bernstein Research, this is a big mistake for Barclays.

Barclays has been undergoing something of a PR nightmare. Scandals around Libor, PPI, and the mis-selling of interest-rate swaps to SMEs have all hit the bank over the past year. Ongoing investigations into 2008 capital injections from Qatar took a fresh turn today after the Financial Times reported that Barclays may have loaned Qatari investors money to buy the bank's shares.

New chief executive Antony Jenkins, the former head of retail, has announced that he will not be receiving a bonus for 2012, the closest a banker comes to a public penance.

So perhaps now is not the time to expand and strengthen its investment bank, a sentiment Jenkins appears to agree with. According to reports, Barclays last month began to cut headcount by 10% across its global investment banking business.

But now is the time to build, not cut, according to Bernstein.

Chirantan Barua, senior banks analyst at Bernstein, in a note yesterday, entitled "BarCap ...the Investment Bank that could have been a European winner", said: “Heading into the Barclays investor day on the 12th, February, we lament the lost opportunity of its investment banking unit. As a survivor from the post Lehman crisis, it had the chance to be one of the few broker dealers to turn in a 12%+ return on equity in a post Basel III world.

“But we believe management is changing course, regulatory and political pressures are high to curtail capital allocation to the bank and its current portfolio of businesses is heading straight into a 9% through the cycle return on equity franchise.”

The profitability of its traditional revenue generator – the fixed income, commodities and currency business responsible for approximately two-thirds of investment banking revenues, according to Bernstein – is being damaged by regulation such as Basel III.

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Bernstein said: “The hardest hit will be FICC and even more so in structured products – the heart and soul of Barclays' business. So unlike a Goldman Sachs which has a much more diversified revenue mix, Barclays starts with a handicap given its mix.”

Outside FICC, Barclays is doing well. The US advisory business – bought by pariah and former chief executive Bob Diamond from the Lehman Brothers wreckage – has a 7.6% ECM share and a more than 6% of M&A share in the country last year, according to Bernstein. According to analysis by Financial News, Barclays had a role in 50% of all US block trade deal volume last year, an impressive feat.

Instead of making the most of this diversification, Barclays is retreating. Barua said: “We do not believe the current management team has the desire, the backing or the capital to build out a global equities and investment banking franchise to supplement the fixed-income business. Anecdotal evidence suggests quite the contrary – we believe the bank is curtailing down on investment banking and equities in markets such as Asia leaving the franchise naked in areas of high growth.”

But perhaps the age of having a finger in every pie is over (Goldman Sachs excepted).

James Chappell, banks analyst at Berenberg, said: “The belief has always been you need to be all things to all people. But, when you look at the future of regulation and the changes within the industry, I am not sure you can really say that anymore. As the new heads of Deutsche Bank’s investment bank said, you can no longer have this optionality. You have to focus on areas where you have competitive advantage and are profitable.”